Saving does not save the economy
By Tafara Mtutu
SAVINGS, in the economic sense, refers to the amount of income that remains after autonomous and discretionary consumption. Autonomous consumption is defined as the expenses that consumers must make even when they have no disposable income, while discretionary consumption largely refers to non-essential expenses.
Various studies have concluded that countries with a good savings culture tend to experience stronger economic growth and vice versa.
Much of this economic relationship has remained true, but the unique case of Zimbabwe has called this long-standing relationship into question over the past 20 years.
The level of savings is determined by four main factors, namely (i) interest rates, (ii) wealth, (iii) income distribution and (iv) consumer credit. Higher interest rates often encourage higher savings because of a better rate of return on funds held in the bank.
Monetary policy makers often use interest rates as a tool to control economic growth, for example by raising interest rates to slow demand-induced inflationary pressures and vice versa to stimulate economic growth.
In Zimbabwe, interest rates have been disconnected from current levels of inflation, which has contributed to the country’s poor savings culture in the formal system.
Zimbabwe’s policy rate has hovered between 15% and 70% since 2019, which is not commensurate with the very high year-over-year inflation figures over the same period.
Zimbabwe’s year-on-year inflation fell from 57% in January 2019 to 837% in July 2020 before falling to 50% in August 2021. The disparity between inflation and interest rates deterred savings in due to the loss in real dollars suffered by depositors during the period.
According to various studies, the richest people tend to save more and vice versa.
Wealth in this context is often represented by GDP per capita, or simply the GDP of a country divided by its population.
Zimbabwe’s GDP per capita trend has been declining since it experienced a bumper harvest similar to that of the most recent agricultural season.
However, consecutive droughts, inflation and currency depreciation in the years that followed resulted in a GDP per capita of USD 1,128 in 2020, 22% lower than in 2016. Given the improvement Of wealth after good agricultural seasons and the strong possibility of a good back-to-back season in 2021/22, Zimbabwe’s wealth is expected to increase in 2021 and 2022, with positive implications for the country’s savings levels.
The relationship between income and savings is similar to the relationship between wealth and savings. However, there is more to unpack when it comes to income distribution.
Economic theories on saving note a factor known as the average propensity to save, or savings rate, which is the percentage of income saved rather than consumed.
This ratio is often used as a leading indicator of economic growth by economists.
This percentage is also used to calculate the marginal propensity to save, that is, the increase in savings for every dollar of additional income.
The marginal propensity to save is essential to quantify the magnitude of the increase in savings on economic output, and this is affected by the distribution of income.
In a more egalitarian society, an increase in aggregate disposal income will translate into higher economic output compared to an economy with high income inequalities.
In addition, in an economy characterized by high income inequalities, the majority of the population incurs autonomous consumption above their income level and often results in negative savings or dissavings.
Zimbabwe’s level of income inequality, as measured by the Gini coefficient, exceeded 50% in 2019, indicating that the country is currently far from equality and explaining why Zimbabwe’s savings rate has been mostly negative since 2000.
Consumer credit is also known to increase spending and reduce savings.
However, Zimbabwe has very limited access to credit facilities and actions taken by the central bank to curb speculative borrowing through the parallel market have inadvertently made easy access to credit funds difficult.
There are also some unconventional but important factors in the Zimbabwean context, the main ones being (i) trust in the formal system and (ii) interest payments on savings accounts. Zimbabweans lost faith in the formal system after the parity between the bonds and the US dollar collapsed and deposits were converted to ZWL balances at 1: 1 between 2018 and 2019.
This was exacerbated by the depreciation of the ZWL, something that continues to this day. As a result, any funds set aside as savings are hardly held in formal banks for the benefit of “mattress banks”.
This subsequently implies that there are savings in the economy that remain outside the formal system, which limits the impact of savings on Zimbabwe’s economic output.
However, we note the recent central bank directive (SI 65 of 2020) for banking institutions to start paying interest on savings and term deposits, which is a welcome step to encourage the return of funds to the bank. formal system where they can improve the multiplier effect of savings.
- Mtutu is Research Analyst at Morgan & Co. – [email protected] or +263 774 795 854.